Candlestick patterns are a great way to assess market sentiment at a glance. While they aren’t very reliable on their own, many traders use them to confirm other technical indicators or chart patterns and tilt the odds in their favor. This makes them a valuable addition to any trader’s repertoire.
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What is a Spinning Top?
Spinning tops are candlesticks with small real body and long upper and lower shadows. The short real body suggests that there was a lot of indecision in the market regarding the direction of the price, while the long shadows indicate that both bulls and bears were active during the session.
Example of a Spinning Top – Source: TrendSpider
The meaning of a spinning top depends on its position within the previous trend:
- Following an Uptrend: Spinning tops occurring after an uptrend suggest that the bulls may be losing momentum and a bearish reversal may occur.
- Following a Downtrend: Spinning tops occurring after a downtrend suggest that the bears may be losing momentum and a bullish reversal may occur.
Candlesticks that resemble a spinning top with shorter and uneven shadows are known as doji.
How to Spot a Spinning Top
Spinning tops are one of the most frequent candlestick patterns, which makes them very easy to spot on most charts. They are most commonly found at the beginning or end of short-, medium- or long-term trends with their short real body and long shadows, but they can appear nearly anywhere.
TrendSpider automatically identifies spinning tops with mathematical precision. You can quickly highlight all spinning top patterns on a chart or even setup custom alerts that incorporate them. This can be very helpful to see confirmations at a glance or add them to your strategies.
Spinning Tops on TrendSpider – Source: TrendSpider
As you can see in this example, there are many different spinning tops that appear on a chart. It can be hard to know what patterns actually matter and separating the signal from the noise. We will take a look at how to read and interpret spinning tops in the next section.
How to Trade a Spinning Top
Spinning tops aren’t a very reliable technical indicator in isolation. According to Bulkowski, spinning tops predict a reversal roughly 50 percent of the time — not very helpful. They also appear very frequently in a chart, which means that it’s important to get a wider context before trading them.
Spinning tops work best when used in conjunction with technical indicators or chart patterns as a confirmation. In other words, another form of technical analysis may indicate that a reversal is likely to occur and spinning tops can further tilt the odds in favor of a reversal.
For example, suppose that a stock you’re watching is forming a double bottom, which suggests that a bullish reversal may occur. You may look for a spinning top at the second bottom to confirm that the reversal is likely to occur. If there’s a bearish candlestick instead, you may not be so confident.
A Real-life Example in Action
Let’s take a look at a real-life example of spinning tops and see how they can be used as confirmation of a reversal.
Example of Spinning Tops as Confirmation – Source: TrendSpider
In the above example, you can see many different spinning tops appearing on a S&P 500 SPDR (SPY) chart. They aren’t very helpful as a standalone indicator given their frequency and lack of predictive accuracy. But after adding trend lines, they become a helpful confirmation for a reversal.
The Bottom Line
Spinning tops are a candlestick pattern that frequently appears in charts, but they are not very reliable on their own. Many traders use them in combination with other forms of technical analysis — especially as a confirmation. Adding spinning tops to your trading repertoire can improve your odds of success.